A Practical Navigator for the Internet Economy

Why Does the US Have Expensive and Obsolescent Broadband?

COOK Report, Comparing US and Canada, Scrutinizes Current State of Regulatory Gridlock

How to purchase this issue. $200 single copy or 600 group.

Introduction - Eyes Wide Shut

The talk is all about investment in broadband. But the reality is the use of lobbying and lawyers to twist the framework of regulations so that cablecos and telcos are free to sell expensive and obsolescent broadband. This issue of the COOK Report scrutinizes the current state of regulatory gridlock in the USA. It looks to Canada to answer questions like why Bell Canada’s cost for DSL is only 10.95 Canadian and most American prices are nearly $40.

We claim that building a broadband infrastructure is important. The tardy telcos say that they need encouragement given the huge expense of the buildout. However, the poor quality, broadband DSL offered is likely so cheap to deliver that the result is a subsidy of the inefficiencies of the old phone network. The goal is supposed to be radical change. The result is likely more of the same. As we shall show, policy is built on a wing and a prayer because we simply have no way to find out what DSL actually costs companies like Verizon and SBC to deliver.

 

This issue of the COOK Report describes how and why telecom regulation in the US was successful until the collapse of the bubble at the end of the century. In discussions with Scott McCollough and Francois Menard it then explains the steps that the Powell FCC is taking to give the ILECs and Cablecos in the US what they want. Starting with the cable networks American policy, destroying incentive to innovate, is now founded on giving free reign to the TV content monopoly with its huge captive installed Internet base so that it can pay down some of its debt and have a cash flow large enough to pay the demands of the sports channels for increased viewing fees. These people who have no clue that Internet is something other than another form of entertainment and have no regulatory oversight are investing capital in the wage demands of sports figures and entertainers rather than in infrastructure and tools necessary to enable individual Americans to compete in the global economy. Japan, Korea and perhaps China are instead following policies that will enable them to do in telecommunications and information technology in general in the first half of this century what Americans did in the last half of the century just ended.

Watching the deployment of global broadband it is hard to see the United States as anything else except the 21st century “new” Roman Empire with Washington running the printing presses and our public and regulatory policy captive to the local phone companies that are unwilling and perhaps fiscally unable to cast off their 19th century roots. Extend to us the freedom that you have offered to the cable networks they say. While once staid and traditional Japan engages in creative destruction (or reconstruction) of its copper local loop with soon to be offered 40 megabit per second DSL, in the US, the two mega (SBC & Verizon) and two semi mega (BellSouth and Qwest) local phone companies invest in armies of lawyers to co-opt the FCC and the PUCs in each of the states fighting for their right to deliver what is usually sub-megabit-per-second, “so called” DSL broadband to American homes.

It should not be surprising that the market for DSL equipment innovation is Korea, and Japan. And Europe. Not the imperial US where the LECs invest in lawyers rather than innovation. While in Canada the LEC and cableco’s are effectively competing, in the US they have a tacit agreement not to compete with the telco’s beginning to drop the price of DSL significantly below cable modem which, rather than cut its prices, increases its bandwidth download from a possible maximum of 1.5 to a possible maximum of 3 megabits per second . Consequently, a small business like The COOK Report is stuck paying $43 a month to a Comcast that thinks the Internet is just a different form of TV and delivers abysmal service. Were it not for Vonage, we’d happily go back to dial up.

The situation is laden with irony. Given different priorities stemming from less backward looking imperial leadership, there is no technological reason that, on short urban cooper loops, the ILECs could not be delivering 10 to 20 megabit per second DSL in American cities. American ILECs acknowledge that DSL can reach 80 to 90 percent of their customers. But the wait is going to be a long time because there is no competition. As readers of our interview with Pedestal Networks will see, the coverage extension is achieved by installation in small LEC owned remote cabinets known as serving area interfaces. There is no way that an ILEC will give a competitor access to those interfaces. And with the FCC’s intent to declare broadband an information service, the LECs are being signaled that they may refuse access to their networks to anyone but themselves.

Their options for pricing DSL are many and, as the articles in this issue show, they are so complex as to defy the ability of anyone with out access to multiple sets of LEC books to ascertain the true cost of delivering the service. We do however have some hints. Bell Canada can deliver DSL for $13.51 a month – a fee that includes a 15% markup over its actual cost. This figure is approximately 10 US dollars per month. Pedestal Networks asserts that their line powered remote installed DSLAM bricks can enable LECs to sell DSL at $19.95 a month and make a profit. Compare this to DSL prices of $35 to 40 a month with recently announced competitive prices in the $26 to 29 a month range.

What we see is the FCC and Congress in unholy alliance with the LECs to enable them to march forward on a 20 to 30 year path converting their networks to the new technology on a basis that is fully subsidized by individual and small business subscribers. Perhaps while condemning the United States to technology obsolescence, it will save the LECs and enable them to transition their networks by 2020. And of course if it does that, it may preserve shareholders investments. Of course if interest rates go up substantially, with LECs overall business flat to declining, one should not count on avoiding collapse.

A Chain of Reasoning

What follows is an interpretive summary of what we have learned in putting this issue together. It is designed to be a bare bones road map to the evolution of the regulatory landscape and the critical changes now in the balance. It should give a high level sense of how we got to where we are. It is intended to provide a context in which to think about the changes being proposed.

1. In 1934 ATT was given what was tantamount to national phone network monopoly in exchange for agreeing to regulation with right of interconnection. In other words, it was required to hook up to non-AT&T local carriers -- the independents -- so that local customers could make long distance calls. With the agreement to be regulated came the assurance of guaranteed rates of return.

2. With emergence of data communications it was decided that companies providing data communications didn’t need to be regulated since data communication was regarded as a new, open and competitive business.

3. The problem was that data com depended on access to the phone networks and the issue became what to do when the phone companies wanted to do data com themselves? Since they owned the network on which their unregulated competitor depended, the issue was: how could they be let into “play” without being able to use their own network to disadvantage the competition.

4. The telcos (regulated) were let into play in this unregulated area by agreeing to give their competition equal access including equal cost access to their networks.

5. Equal access for everyone was assured by making the transport of data com subject to existing common carrier regulations.

The Internet Was Born of A Separation of Transport and Services Now Being Abandoned

6. As computers on which data com depended became more powerful, the data com folk wanted to offer ‘fancy’ services on top of basic transport. In this new context, the concern was that if these services were regulated every one would be shoe horned into having to offer the same price for the same services and incentive to innovate would be lost.

7. As a result it was decided that enhanced services under Title I of the 1934 Act could be offered with no regulation and no price controls on top of basic data network, which was regulated, common carrier transport under Title II of the 1934 Communications Act

8. The telcos agreed to accept these restrictions so that they too could play in the enhanced services data com game under the unregulated Title I part of the 1934 Act

9. With Computer Inquiry II telcos got the chance to offer enhanced unregulated services themselves for the first time,

10. After divestiture the rules for what were “enhanced services” and free from regulation (Title I) and what were not (Title II) and who could offer what and on what terms were subject to argument.

11. With Computer III the telcos got even more freedom to offer unregulated services (Title I)

12. Now the following is critical -- Title II regulation had been designed to ensure that there could be some competition in the use of what otherwise would have been regarded as a natural monopoly.

No Competition without Access to the Network

13. The problem was that without access to the basic network you could not compete in the delivery of Enhanced Services and could not innovate new services so the system was set up to guarantee all would be providers of Enhanced Services access to the basic network under Title II PSTN common carriage basic services.

14. With a level playing field open equally to all comers, these comers were able to offer new and fancy data services (aka enhanced services ) on an unregulated basis.

15. Over the long term the real problem has been that the data services under Title I turned digital. As they did more and more Title II analog services could be offered digitally under Title I without regulation much more cost effectively than under Title II.

16. What we are now seeing is a convergence between the two industries. Telecom and computing and where digital computing, unregulated and offered under Title I, will threaten to turn suck the Title II PSTN dry and bankrupt it.

With Convergence Only Services Worth Giving Are Unregulated (Title I)

17. Under such a scenario, everything worth doing in a really cost effective way will have migrated from regulated Title II PSTN to unregulated enhanced services under Title I.

18. With dial up the US and Canada adopted a regulatory theory where Internet was an enhanced service and should not be regulated. That is it was an enhanced service under Title I.

19. With dial up service the telecom service underlying Internet access was considered competitive in both countries. Therefore both forbore from regulating the otherwise common carrier dial up aspects.

20. With broadband service, since dial up was deemed competitive and not in need of regulation, telcos requested and received forbearance from regulating the otherwise common carrier and hence regulated aspects of DSL.

21. The problem here was that with dial up ISPs did not need to be to have access to and make changes to the physical guts of the network. They could effectively attach CPE (modems) at each end.

Why Title II for DSL Matters to ISPs

22. However with DSL equipment had to be located in central offices or remotes and attached at many places to the copper plant to make it work. To do DSL a CLEC had to interface in a much more tightly coupled way with the copper plant than before. The copper plant had to be “tuned” to deliver the service in a way that dial up did not demand. The copper plant could be tuned by the LEC or some portion of it tuned and interconnected with by the CLEC. Then the LEC or CLEC would sell DSL transport to the ISP.

23. With access to the physical network necessary in a way that it was not before the change of technology, the telco has lots of new charges that it can levy against those CLECs who would like to be able to independently offer the service. Collocation charges, interconnection charges, engineering study and design charges.

24. ISPs do not get to collocate, interconnect, or obtain UNEs. They are ESPs, not carriers. Only carriers have 251/2 rights. ESPs buy service from LECs. DSL Transport is a telecommunications service; the ISP uses the LEC's DSL service, which is a bundle of the loop and DSLAM and requires another service (ATM, frame relay, Gig-E) to get to the cloud. The ISP is buying a service from the LEC. Computer Inquiry. The ISP then adds its information service on top of the telecom service and provides high speed Internet access to customers.

25. CLECs – be they companies like COVAD or ‘affiliates like SBC ASI -- obtain a DSL capable loop, collocate in a CO or remote and install the DSLAM. They get UNEs and collocation under 251/2. The LEC then provides a telecommunications service to the ISP, which adds its information service on top of the telecom service and provides high speed Internet access to customers.

26. The problem is that if the telco wishes to deliver DSL as an enhanced service, it cannot do so unless it obeys computer II or III and does so in a way that opens its facilities without discrimination. It needs to announce what it charges for and tariff it. That is publish an open price list of what it will charge service providers. If it offers DSL on its own network it must either do so through a separate company – computer 2 with tariffed prices equally available to that company and to its competitors, or according to computer 3 where its subsidiary is forced to permit open interconnection through CEI and ONA safeguards.

27. The telco (LEC) is not supposed to be able to use its physical network to its own advantage and to the disadvantage of competitors. But with DSL it gets sticky in that in some locations physical interconnect space may be limited. So equal treatment can be difficult.

28. Still the critical safeguard is that for DSL as a telecommunications service it must be tariffed. And open rule book of prices and access must be published.

29. The problem is that the ILECs have claimed that because internet access is competitive, the FCC should forbear in regulation of DSL access. After all DSL is just another form of internet access and that it is we all know, competitive. Except that, as we have just shown, with this new technology more closely tied to the physical plant without regulation, that is without tariffs there will be discrimination by the ILEC in favor of itself and DSL access will no longer be competitive.

Tariff Avoidance Strategy

30. All the major moves we have seen in the US and Canada by the ILEC are designed to discriminate against CLEC and hence the ISP in DSL provision. There is one key way to do that. AVOID having to tariff…. Whatever the cost. Then the ILEC sets whatever price it wishes to for use of its facilities

31. In Canada Bell Canada set up a subsidiary Nexxia that it was using to avoid tariffs

32. When the CRTC said it couldn’t avoid them, it folded the subsidiary

33. A critical legal question in the US will be whether the ILECs will be able to avoid having to tariff access to their networks.

34. If DSL is a communications service the LEC must tariff . If an information service the LEC doesn’t need to tariff.

35. The problem is that the ILECs have dug in their heels and are essentially refusing access to their networks an access to their customers in the last mile for broadband unless they get their own terms. They have a strangle hold because broadband needs physical access to parts of the network that dial up did not.

Why Deregulating PSTN (Title II) Means Re-monopolization

36. FCC wants to solve it by declaring both cable and DSL broadband information services under Title I unregulated allowing a duopoly to replace the PSTN

37. With the Brand X decision it will be very difficult for FCC to do this. In fact the FCC grand design is probably stymied giving us regulatory grid lock

38. Open access and IP digital network innovation likely means the death of the LECs that looks like it is too much for congress and FCC to bear.

39. So the push will continue in the direction of duopoly stagnation and loss of innovation with wireless and municipal networks as possible breakers of the gridlock.

Or as Scott McCollough says: The Brand X court "got" it. The FCC and ILECs are conflating two different things. You have a telecommunications component and an information component. There is "transport", raw, dumb pipe:

§ 153(43) Telecommunications.--The term ''telecommunications'' means the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received.

and then there is the Internet access, an information service

§ 153(20) Information service.--The term ''information service'' means the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.

Which is also an enhanced service:

•47 CFR §64.702 (a) For the purpose of this subpart, the term enhanced service shall refer to services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information. Enhanced services are not regulated under title II of the Act.

The ILECs and the FCC look at "DSL" and see a bundled information service, but they assiduously ignore that there is an underlying telecommunications component. It is offered "via telecommunications"; "over common carrier transmission facilities."

The argument is that the ILECs and cable cos should not have to unbundle the telecom and make that component separately available to competing information service providers. This is a complete about-face and contradicts all the theory underlying Computer Inquiry and the Telecom Act of 96, which recognizes that significant portions of the network are still natural monopoly or subject to the dominant control of the ILECs. In order for there to be any information/enhanced service, the ESP must get access to the telecom component. Allowing the infrastructure owners to cut off open access to the telecom component eliminates competition for information service. In antitrust terms, the ILECs and cablecos are allowed to leverage their bottleneck control over telecom into the adjacent information/enhanced service market.

"DSL service" is a telecom service. The internet access that is supplied over it is enhanced/information. These are two separate things. Carriers provide DSL service. ISPs offer high-speed internet access. Different services, different entities.

Basis of These Findings

While we have had help from many people, we base these findings in particular on extended interviews with Texas telecom attorney Scott McCollough and Canadian broadband expert Francois Menard, a shorter conversation with both the CEO and chief regulatory officer of EarthLink, and on careful readings of articles by Penn State Professor Rob Freiden and Bob Cannon of the FCC Office of Plans and Policy, some high level summary by Canadian attorney Tim Denton and on a very useful interview on DSL technology with Merhan Musai.

Contents

Tour of Regulatory Jungle Shows Powell Effort to Undo 40 Years of FCC Policy -- Bigger-is-Better Ideology toYield Re-monopolization and Harm Economy Unless Stopped By Courts p.1

Understanding the FCC Regulatory Blueprint
Why the FCC Broadband Rulemaking Is a Path to the Re-Monopolization of the Telephone Network p.4

What Changed at the FCC?
The Role of Chairman Powell in Articulating a Bigger-Is-Better Worldview p. 10

Ninth Circuit Weighs in with Brand X Rebuff
Can ISPs Demand Action from State PUCs in Face of Stalemated FCC Policy? p. 12

The Short Happy Life of Verizon’s PARTs
Shoving, Jousting and Obfuscation in the FCC’s Playing of the Tariff Game p. 22

Rapid Changes in DSL Technology - More Powerful, Compact, & Cheaper DSLAMs Located in ILEC Remotes Can Bring DSL to less than $20 a month as ISPs are Locked out of ILEC Infrastructure p. 24

But in a Fight to the Death Between Telco and Cableco Who Will Pay For the New Infrastructure?
An essay by Tim Denton p. 29

Why Regulatory Forbearance of Broadband, Creates a Duopolistic Death Match that Will Leave only Municipal Public Works Standing an essay by Francois Menard with assistance from the COOK Report p. 31

McCollough on Importance of Regulatory Nuances Understanding Differences Between Telecommunications and Telecommunications Services - Parsing the Relationship Between Telecommunication Services, Tariffs, Issues of Access, Non Discrimination and Price p. 37

Why We Simply Don’t know What it Costs SBC and Verizon to Deliver DSL Menard on ILEC Broadband Pricing and Regualtory Manuevers p. 41

EarthLink Shares a Jaundiced View of FCC
Brand X Reversal of Powell Holds Ray of Hope p. 47

Filling Up the Fiber:
A Look at Korean Broadband Infrastructure and Internet Traffic p. 49

Interview, Discussion, and Article Highlights p. 53

Executive Summary p. 62